Enron's Lessons for 401(k)

January 25, 2002

Among the people hurt the most by Enron's bankruptcy are the employees whose retirement kitties were overinvested in the company's stock. Having a nest egg with such a lopsided investment portfolio is not wise risk management for any investor. So is there a lesson for other Americans in their misfortune?

Many in Congress think so, and they plan to rewrite rules for 401(k) plans. Their concern for the employees' financial loss is understandable. But Congress should proceed with caution, lest the federal government become a ersatz broker for private stockholders.

Workers who join companies with 401(k) plans know they have to manage their own investments. Such plans, with the incentive of a tax break, have turned the US into an investor nation, with increasing awareness among workers of the need to diversify a retirement portfolio.

But are all 401(k) investors prepared to manage the risks of volatile securities markets? Obviously, many Enron workers were not. They were banking too much of their retirement kitty on Enron stocks in their 401(k)s. Much of that stock was given to them as a matching contribution by Enron. Companies typically match a portion of the worker's money put into a plan.

Congress may decide that Americans in 401(k) plans are not savvy enough to prevent their retirement funds from tilting too far toward company stock.

But if Congress protects them, why not all investors?

Enron misled both its own workers and outside investors by hiding big debts. The real problem to fix is the lack of accounting transparency in companies.

Some in Congress favor legislation to put a cap, say 20 percent, on how much of any plan can be concentrated in one stock. This has a certain common-sense appeal, and it mirrors federal rules for old-fashioned pensions, which force companies to spread investment around. But it also puts the federal government in the position of telling investors what they can and cannot do.

Some firms, worried that a federal intrusion could limit their ability to match employee contributions with stock instead of cash, might opt out of 401(k) plans altogether. That would be a backward step for most workers.

Wiser moves would include changing the rules so that companies are required to offer employees greater access to professional investment advice. That should encourage them to diversify.

Also under attack is Enron's rule that any stock given to workers could not be sold until they turned 50. That seems like an incentive for retirement savings. But too many workers took it as a signal that Enron stock was a reliable portion of their portfolio. An investment adviser not bedazzled by Enron's hype might have set them straight. Companies with such rules are hindering 401(k) diversity.

This experience with Enron should not only help educate workers about 401(k) management, but also prepare Americans for a national debate about President Bush's idea to let younger workers invest a portion of their Social Security funds in stocks.

As Americans become wiser about diversifying their investments, then Congress can better consider whether to privatize Social Security.